UK economy holding up against Brexit jitters, for now: survey

LONDON (Reuters) - Britain’s economy is holding its solid pace of growth, according to a survey which showed the large services sector expanded more strongly than expected in August, but Brexit worries are hitting investment plans and confidence.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

The IHS Markit/CIPS Purchasing Managers’ Index (PMI) increased to 54.3 in August from 53.5 in July, beating all forecasts in a Reuters poll of economists and rising further above the 50-mark that indicates growth.

The PMI pointed to a repeat of the overall economy’s 0.4 percent quarterly growth rate recorded in the three months to June, IHS Markit said, despite weaker than expected manufacturing and construction PMIs earlier this week.

Separate PMIs suggested the euro zone economy was on course to grow at the same pace in the third quarter.

“(This is) a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month,” IHS Markit’s chief business economist, Chris Williamson, said.

Sterling edged up on Wednesday after the survey was published, but is down more than 10 percent against the U.S. dollar since April when concerns about the potential for an economically damaging Brexit began to build.

Howard Archer, an economist with consultants EY ITEM Club, said the mixed set of August PMIs showed why investors were not expecting the BoE to raise borrowing costs further any time soon, after August’s quarter-point increase to 0.75 percent.

“It looks unlikely that interest rates will rise again until after the UK leaves the EU in March 2019 given the major uncertainties that are likely to occur in the run-up to the UK’s departure,” Archer said.

Britain’s economy has slowed since the June 2016 Brexit vote, its growth rate slipping from top spot among the Group of Seven group of rich nations to jostling with long-term laggards Japan and Italy for bottom place in the rankings.

Nonetheless, last month the Bank of England raised interest rates for only the second time in a decade, due to concerns that labor shortages and other capacity constraints will prevent inflation returning to its 2 percent target in the short term.

Employment intentions in the services sector rose to a six-month high, but confidence for the year ahead slipped to its lowest since March, as businesses said Brexit uncertainty had made clients less willing to invest, for now.

British Prime Minister Theresa May has yet to agree the terms of Britain’s future relationship with the European Union, less than seven months before the country leaves the bloc.

Financial services accounted for much of the growth, and businesses reported softer demand from retailers, who are not directly covered by the services PMI.

Many consumers are feeling the strain of inflation that has been growing faster than their wages for much of the past decade.

“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside,” Williamson said.

Firms in the PMI survey reported paying higher salaries to recruit hard-to-find staff and reduce employee turnover that was limiting their ability to complete some projects.

Official data showed record vacancies and unemployment at a 43-year low in July, but this has not translated into widespread pay rises for the workforce as a whole.

Writing by David Milliken and William Schomberg; Editing by Toby Chopra